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Strategic Investment and Industry Risk Dynamics

Review of Financial Studies, Forthcoming

59 Pages Posted: 19 Jun 2009 Last revised: 17 Jul 2015

Maria Cecilia Bustamante

University of Maryland - Department of Finance

Date Written: July 1, 2014

Abstract

This paper characterizes how firms' strategic interaction in product markets affects the industry dynamics of investment and expected returns. In imperfectly competitive industries, a firm's exposure to systematic risk is jointly affected by its own investment strategy and the investment strategies of its industry peers, such that the dynamics of its expected returns depend on the intra-industry value spread. In the model and the data, firms' betas and returns correlate more positively in industries with low value spread, low dispersion in operating mark-ups, and low concentration.

Keywords: expected returns, investment, imperfect competition, strategic interaction, industry concentration

JEL Classification: L11, L22, G11, G12, G31

Suggested Citation

Bustamante, Maria Cecilia, Strategic Investment and Industry Risk Dynamics (July 1, 2014). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1421748 or http://dx.doi.org/10.2139/ssrn.1421748

Maria Cecilia Bustamante (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

HOME PAGE: http://https://sites.google.com/a/rhsmith.umd.edu/mcbustam/?pli=1

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